Is It Time to Invest in Buffett's Automaker?

For Warren Buffett and Charlie Munger, it's always been about buying simple businesses at prices lower than their intrinsic values. That's it. Though they have historically been reluctant to invest in technology-oriented businesses, the duo has, at times, put major investments in futuristic enterprises. Critics say it's outside the famous investors' circle of competence to invest in anything but old-school, easy-to-understand business models. For Berkshire Hathaway's (NYS: BRK.A) (NYS: BRK.B) Chinese automaker, BYD (NASDAQOTH: BYDDY.PK), it's been a long road down -- but could this be a bottom for the troubled company before it becomes the powerhouse everyone expected it to be?

Sun spotsA few years ago, Berkshire made what at the time was its most progressive and risky investment to date, when the holding company purchased 10% of BYD. Many longtime Buffett-ites lambasted the move as very atypical, risky, and downright foolish (not to be mistaken with Foolish). But the investment thesis was anything but wishy-washy, as Munger considered it to be one of the most amazing companies he'd ever seen. That's a big claim when you've been one of the leading investors in the world for decades.

The China-based automaker, solar-power-cell manufacturer, and battery producer was expected to be the next game-changing company, but BYD has not lived up to expectations. Sales have dwindled, the company has faced extreme competition in its home market and abroad, and product development has fallen behind schedule. Munger and Buffett both admit that BYD has taken an unexpected turn for the worse, but they still believe in the company and have held on to every share they originally purchased for $232 million.

Up to speedIn one of the most devastating reports since Berkshire's investment in the company, BYD reported profits have taken a nosedive of 94% -- about as close to a total loss as a multibillion-dollar company can have.

It wasn't the autos that led the race to the bottom -- it was the company's solar cells and handsets (BYD is a leading Chinese cell-phone battery manufacturer). BYD supplies major cell-phone manufacturers such as Nokia and HTC.

Vehicle sales did decline in both Europe and in Asia, though not as sharply as the company's other products. European sales were hit by the debt crisis and general economic downturn, while Asian sales slowed because of further invasion from the leading auto seller in the region -- Volkswagen (NASDAQOTH: VLKAY.PK). While BYD's auto sales fell by roughly 11% in the first part of this year, Volkswagen recorded a nearly 20% gain.

Controlled responseIf this were any major U.S. company reporting a nearly total loss of profits in one half of a year, CNBC and everyone one else would contribute to sending the stock down 10%, 20%, maybe 50% in a day. Though in a moment of odd stability, the stock is down only a few points. That's because BYD management publicly expected sales to drop by this amount back in April. Moreover, since 2010, the stock price has dropped from around $15 per share to less than $4 today.

So, given the sharp price decline over the past few years, the worsening performance, and tepid outlook, is BYD heading for the grave, or is this the time to jump in? Ordinary investors are now the closest they've been in a while to getting in on the company near Berkshire's price of a little less than $2 per share.

Even Buffett and Munger will tell you they don't quite understand the business. Chuanfu Wang is a technical genius and mad scientist. The business is diversified under the umbrella of clean energy solutions. It's in a growing market, though with a high degree of volatility and risk. The investment entirely rides on the abilities of the CEO and lead innovator.

For Asian exposure in the automotive markets, investors have been more likely to turn to Volkswagen or even American automakers, such as Ford (NYS: F) , for their capital allocations. Ford historically has little presence in the market, though with the introduction of its compact truck, the Ranger, and its available 40-mpg engine, it is witnessing impressive growth and market penetration in a region that purchases even more trucks than Americans do. Ford, on a P/E basis, is currently cheaper than both BYD and Volkswagen.

Tolerance campIf you believe that BYD, even with its missteps, is a fundamentally good company, this could be the cheapest entry point for years to come. However, it's imperative to realize the level of risk and volatility involved with an investment in this company. My interest in BYD is a matter of faith in Warren Buffett, Charlie Munger, and Chuanfu Wang. It may seem a thin argument, but I have tremendous faith in the investors who seem to have tremendous faith in this CEO.

If investing in BYD sounds like more risk than having an affair with a Mafia wife, you may want to stick to a company like Ford. Our analysts have provided a premium report outlining the obstacles and opportunities facing the American legacy auto manufacturer that includes not only a write-up from one of our top analysts, but also continuing updates. Get started now!